The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:
When business goes sideways, it’s up to the special servicer to make the tough decisions. Whether it’s recapitalized, whether there’s going to be a workout, this is up to the special servicer entity. One example of a special servicer decision is Starwood’s recent loss of a $1.8 billion asset.
Richard Wilson: What is a special servicer?
S.L. Van Der Zanden: Okay, this I can talk about for a while, so cut me off if I go too far, because this is something that most people don’t know. So, let’s start at the beginning – this collateralized mortgage backed securities, which are mortgage loans made to real estate but are funded from a pool of investors. So you have a pool of investors that don’t know each other, they’re passive, and you have this mortgage honored piece of real estate that’s obviously active. So, while a loan is being paid promptly and nothing is going on, they call that the servicer, like a Wells Fargo collects the mortgage payments and cashes it, and applies it, and sends checks to people in the bond pool everybody’s happy. But when things go sideways – and anything could be, whether it’s a borrower issue or the tenancy has dropped below a certain level and there’s different triggers that will cause the file to move to the special servicer – and they’re basically God. They’re like an owner of the real estate, via the loan, and it’s going to be foreclosed or there’s going to be a workout, or it’s going to be recapitalized, all those decisions are made by the special servicer.
Richard: Hmm, okay. And I saw a headline in the Wall Street Journal yesterday from either the Simon Mall Group or Starwood who lost $1.8 billion…
S.L.: It was Starwood.
Richard: It was Starwood. Of a mall, and apparently they broke some covenant or debt level or some performance level, they lost control of the asset. Is that an example of it going to a special servicer?
S.L.: That’s exactly what we’re talking about, yeah.
Richard: You would think, this giant firm would say “Well, let’s just put dollars from this account to this account. Let’s do this or that so we don’t lose a $1.8 billion asset.” Is it just they didn’t have the balance sheet to do that, so they gave one up to the wolves and they’re going to secure the rest? Or how does that even happen?
S.L.: That’s my guess. Had it been doable, they would’ve done it. So, they must’ve been painted into the corner where they just weren’t able to play that card.
Richard. Right, right. Interesting, ok.